How to Claim California’s R&D Credit

Downtown Los Angeles, California, USA skyline at dawn.

The nation’s third-largest state offers one of the best Research & Development tax incentives in the country.

The California R&D Tax Credit can be a significant addition to revenue for Silicon Valley startups, Los Angeles Architects, San Diego Breweries and beyond. Any C-Corp, S-Corp-, LLC or Partnership is eligible and should look to partner with a team of national tax experts that can guide them through the process of attaining the lucrative credit.

Although the Research and Development tax credit is open to small, medium and large size businesses, it’s no surprise that companies with the largest footprint often receive the largest R&D tax credits, both in California and across the US. This is mostly due to resources and availability of information. The process, while complex, can be navigated efficiently and effectively by any size business with the right help.

The first step to applying for R&D in California 

Any business that is considering applying for the Research & Development tax credit must consider the IRS’s Four-Part Test. This checklist is outlined in the following ways:

  • Technical uncertainty. An activity performed to eliminate technical uncertainty in regards to the capability, methodology or design of the project or product.
  • Process of experimentation. The business must prove how its components progress step by step from planning, prototypes, testing, and release, and that this process resolves uncertainty.
  • Technological in nature. The project or activity must be rooted in the hard sciences, such as engineering, physics, chemistry, or computer science.
  • Qualified purpose. The business must have undergone the process of creating a new or improved product or process (computer software included) to increase performance, function, reliability, or quality.

California’s R&D tax credit requirements follow those of the federal credit closely. Here are some specific differences:

  • Qualified Research Expenses (QRE’s) must be performed in California to receive the state’s credit.
  • The Alternative Simplified Credit (ASC) method does not exist in California
  • Unused R&D credits can be carried forward indefinitely in California, versus federal credits that can be carried forward twenty years.
  • California has a different definition of gross receipts that should be closely followed

For companies operating from San Francisco to Sacramento, San Diego to Silicon Valley, as well as in other parts of California, the Research and Development tax credit can be a valuable tool for increasing their bottom line. If you are considering claiming your R&D tax credit, partner with trusted tax experts. Call National Tax Group at 561-257-3436 to start your free assessment.

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